[Federal Register Volume 84, Number 98 (Tuesday, May 21, 2019)]
[Notices]
[Pages 23125-23138]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-10351]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85854; File No. SR-NYSEArca-2019-01]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Amendment No. 1 and Order Instituting Proceedings To Determine 
Whether To Approve or Disapprove a Proposed Rule Change, as Modified by 
Amendment No. 1, Relating to the Listing and Trading of Shares of the 
Bitwise Bitcoin ETF Trust

May 14, 2019.
    On January 28, 2019, NYSE Arca, Inc. (``Exchange'' or ``NYSE 
Arca'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to list and trade shares of the Bitwise Bitcoin 
ETF Trust under NYSE Arca Rule 8.201-E. The proposed rule change was 
published for comment in the Federal Register on February 15, 2019.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 85093 (Feb. 11, 
2019), 84 FR 4589 (Feb. 15, 2019).
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    On March 29, 2019, pursuant to Section 19(b)(2) of the Act,\4\ the 
Commission designated a longer period within which to approve the 
proposed rule change, disapprove the proposed rule change, or institute 
proceedings to

[[Page 23126]]

determine whether to approve or disapprove the proposed rule change.\5\ 
On May 7, 2019, the Exchange filed Amendment No. 1 to the proposed rule 
change, which replaced and superseded the proposed rule change as 
originally filed.\6\ As of May 14, 2019, the Commission has received 25 
comment letters on the proposal.\7\
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    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 85461 (Mar. 29, 
2019), 84 FR 13339 (Apr. 4, 2019). The Commission designated May 16, 
2019, as the date by which the Commission shall approve or 
disapprove, or institute proceedings to determine whether to approve 
or disapprove, the proposed rule change.
    \6\ Amendment No. 1 is available at: https://www.sec.gov/comments/sr-nysearca-2019-01/srnysearca201901-5461982-184967.pdf.
    \7\ Comments on the proposed rule change can be found at: 
https://www.sec.gov/comments/sr-nysearca-2019-01/srnysearca201901.htm.
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    The Commission is publishing this notice and order to solicit 
comments on the proposed rule change, as modified by Amendment No. 1, 
from interested persons and to institute proceedings pursuant to 
Section 19(b)(2)(B) of the Act \8\ to determine whether to approve or 
disapprove the proposed rule change, as modified by Amendment No. 1.
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    \8\ 15 U.S.C. 78s(b)(2)(B).
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I. Exchange's Description of the Proposal, as Modified by Amendment No. 
1

    The Exchange proposes to list and trade shares of the Bitwise 
Bitcoin ETF Trust under NYSE Arca Rule 8.201-E. This Amendment No. 1 to 
SR-NYSEArca-2019-01 replaces SR-NYSEArca-2019-01 as originally filed 
and supersedes such filing in its entirety. The proposed change is 
available on the Exchange's website at www.nyse.com, at the principal 
office of the Exchange, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of, and basis for, the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of those statements may be examined at 
the places specified in Item IV below. The Exchange has prepared 
summaries, set forth in sections A, B, and C below, of the most 
significant parts of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to list and trade shares (``Shares'') of the 
Bitwise Bitcoin ETF Trust (the ``Trust''), under NYSE Arca Rule 8.201-
E.\9\
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    \9\ The Trust is a Delaware statutory trust. On January 10, 
2019, the Trust filed with the Commission an initial registration 
statement on Form S-1 under the Securities Act of 1933 (15 U.S.C. 
77a) (the ``Securities Act'') (File No. 333-229180). On April 6, 
2019, the Trust filed with the Commission Pre-Effective Amendment 
No. 1 to the initial registration statement (the initial 
registration statement, as amended by Pre-Effective Amendment No. 1, 
the ``Registration Statement''). The description of the operation of 
the Trust herein is based, in part, on the Registration Statement.
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    According to the Registration Statement, the Trust will not be 
registered as an investment company under the Investment Company Act of 
1940, as amended,\10\ and is not required to register under such act. 
The Trust is not a commodity pool for purposes of the Commodity 
Exchange Act, as amended.\11\
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    \10\ 15 U.S.C. 80a-1.
    \11\ 17 U.S.C. 1.
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    The Trust is managed and controlled by Bitwise Investment Advisers, 
LLC (the ``Sponsor'').
    The Trust will offer Shares of the Trust for sale through the 
Trust's Marketing Agent in ``Creation Units,'' as described below. The 
Marketing Agent will also assist the Sponsor and the Trust's 
administrator with certain functions and duties relating to 
distribution and marketing.
    The Exchange represents that the Shares satisfy the requirements of 
NYSE Arca Rule 8.201-E and thereby qualify for listing on the 
Exchange.\12\
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    \12\ With respect to the application of Rule 10A-3 (17 CFR 
240.10A-3) under the Act, the Trust relies on the exemption 
contained in Rule 10A-3(c)(7).
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Operation of the Trust \13\
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    \13\ The description of the operation of the Trust, the Shares 
and the bitcoin market contained herein are based, in part, on the 
Registration Statement. See note 9, supra.
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    According to the Registration Statement, the investment objective 
of the Trust is to provide exposure to bitcoin that is reflective of 
the actual bitcoin market where investors can purchase and sell 
bitcoin, less the expenses of the Trust's operation. In seeking to 
achieve its investment objective, the Trust will hold bitcoin, and in 
seeking to ensure that the price of the Trust's shares is reflective of 
the actual bitcoin market, the Trust will value its shares daily based 
on prices drawn from ten bitcoin exchanges that the Sponsor and its 
affiliate, Bitwise Index Services, LLC (``Bitwise Index Services'') 
believe, based on their research and analysis (discussed below), 
represent substantially all of the economically significant spot 
trading volume on bitcoin exchanges around the world (the ``Bitwise 
Daily Bitcoin Reference Price'' or ``Bitcoin Price'').\14\
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    \14\ Bitwise Index Services conducts research upon and provides 
pricing and indexing data related to the bitcoin market for use by 
the Trust and other unaffiliated parties. Bitwise Index Services 
manages the process for collection and dissemination of the Bitcoin 
Price with input from its Bitwise Crypto Index Committee, which has 
ultimate responsibility and authority for developing, maintaining 
and adjusting the Bitcoin Price as well as other cryptoasset data 
products and indexes. The Committee is composed of three members of 
the Bitwise leadership team selected for seniority and expertise in 
indexing, cryptoassets and data engineering. The Committee is 
advised in this effort by the Bitwise Crypto Index Advisory Board 
(the ``Advisory Board''), an independent group of leading experts in 
the fields of both traditional asset indexing and crypto assets with 
members both internal and external to Bitwise. Advisory Board 
suggestions are not binding to the Committee. Bitwise Index Services 
and the Sponsor are referred to herein as ``Bitwise'' throughout 
unless the explicit clarification of a particular role of either 
affiliate is required to describe the operations of the Trust. Both 
Bitwise Index Services and the Sponsor are affiliates of Bitwise 
Asset Management, Inc.
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    The Trust will store its bitcoin in custody at a regulated third-
party custodian, and will not use derivatives that may subject the 
Trust to counterparty and credit risks.
    The Trust will process all creations and redemptions in-kind, and 
accrue all fees in bitcoin (rather than cash), as a way of ensuring 
that the Trust holds the desired amount of bitcoin-per-share under all 
scenarios. The Trust will not buy or sell bitcoin under any situation 
other than if the Trust is required to liquidate.
    The Sponsor believes that the design of the Trust will enable 
certain investors to more effectively and efficiently implement 
strategic and tactical asset allocation strategies that use bitcoin by 
investing in the Trust's Shares rather than purchasing, holding and 
trading bitcoin directly, while protecting the Trust from potential 
concerns around market manipulation and other factors, as explained 
below.
Bitcoin, Bitcoin Market, Bitcoin Exchanges and Regulation of Bitcoin
    The following sections describe bitcoin, including the historical 
development of bitcoin and the bitcoin network, how a person holds 
bitcoin, how to use bitcoin in transactions, the ``exchange'' market 
where bitcoin can be bought, held and sold, and the bitcoin ``over-the-
counter'' (``OTC'') market.

[[Page 23127]]

Bitcoin
    According to the Registration Statement, bitcoin is a digital asset 
that can be transferred among parties via the internet. Unlike other 
means of electronic payments such as credit card transactions, one of 
the advantages of bitcoin is that it can be transferred without the use 
of a central administrator or clearing agency. Because a central party 
is not necessary to administer bitcoin transactions or maintain the 
bitcoin ledger, the term decentralized is often used in descriptions of 
bitcoin.
Bitcoin Network
    Bitcoin was first described in a white paper released in 2008 and 
published under the name ``Satoshi Nakamoto.'' The protocol underlying 
Bitcoin was subsequently released in 2009 as open source software and 
currently operates on a worldwide network of computers.
    For persons that want to use bitcoins to pay for goods and services 
in actual transactions, the first step is to download specialized 
software referred to as a ``bitcoin wallet.'' A user's bitcoin wallet 
can run on a computer or smartphone, and can be used both to send and 
to receive bitcoin. Within a bitcoin wallet, a user can generate one or 
more unique ``bitcoin addresses,'' which are conceptually similar to 
bank account numbers. After establishing a bitcoin address, a user can 
send or receive bitcoin from his or her bitcoin address to another 
user's address. Sending bitcoin from one bitcoin address to another is 
similar in concept to sending a bank wire from one person's bank 
account to another person's bank account.
    The amount of bitcoin associated with each bitcoin address is 
listed in a public ledger, referred to as the ``blockchain.'' Copies of 
the blockchain exist on thousands of computers on the Bitcoin network 
throughout the internet. A user's bitcoin wallet will either contain a 
copy of the blockchain or be able to connect with another computer that 
holds a copy of the blockchain.
    When a bitcoin user wishes to transfer bitcoin to another user, the 
sender must first request a bitcoin address from the recipient. The 
sender then uses his or her bitcoin wallet software to create a 
proposed addition (often referred to as a ``transaction'') to the 
blockchain. The proposal will reduce the sender's address and increase 
the recipient's address by the amount of bitcoin desired to be 
transferred. The proposal is completely digital in nature, similar to a 
file on a computer, and it can be sent to other computers participating 
in the Bitcoin network.
Bitcoin Transactions
    A bitcoin transaction is similar in concept to an irreversible 
digital check. The transaction contains the sender's bitcoin address, 
the recipient's bitcoin address, the amount of bitcoin to be sent, a 
transaction fee and the sender's digital signature. The sender's use of 
his or her digital signature enables participants on the Bitcoin 
network to verify the authenticity of the bitcoin transaction.
    A user's digital signature is generated via usage of the user's so-
called ``private key,'' one of two numbers in a so-called cryptographic 
``key pair.'' A key pair consists of a ``public key'' and its 
corresponding private key, both of which are lengthy alphanumeric 
codes, derived together and possessing a unique relationship.
    Public keys are bitcoin addresses that are publicly known and can 
accept a bitcoin transfer. Private keys are used to sign transactions 
that initiate the transfer of bitcoin from a sender's bitcoin address 
to a recipient's bitcoin address. Only the holder of the private key 
associated with a particular bitcoin address can digitally sign a 
transaction proposing a transfer of bitcoin from that particular 
bitcoin address.
    A user's bitcoin address may be safely distributed, but a user's 
private key must be kept in accordance with appropriate controls and 
procedures to ensure it is used only for legitimate and intended 
transactions. Only by using a private key can a bitcoin user create a 
digital signature to transfer bitcoin to another user. In addition, if 
an unauthorized third person learns of a user's private key, that third 
person could forge the user's digital signature and send the user's 
bitcoin to any arbitrary bitcoin address, thereby stealing the user's 
bitcoin.
    The usage of key pairs is a cornerstone of the Bitcoin network. 
This is because the use of a private key is the only mechanism by which 
a bitcoin transaction can be signed. If a private key is lost, the 
corresponding bitcoin is thereafter permanently non-transferable. 
Moreover, the theft of a private key enables the thief immediate and 
unfettered access to the corresponding bitcoin. For large quantities of 
bitcoin, holders often embrace sophisticated security measures. The 
Trust will use a regulated, third-party custodian with institutional 
design controls and redundancies in place to safeguard and hold in 
custody the bitcoin private keys.
    The Bitcoin network incorporates a system to prevent double 
spending of a single bitcoin. To prevent the possibility of double-
spending a single bitcoin, each validated transaction is recorded, time 
stamped and publicly displayed in a ``block'' in the Bitcoin 
Blockchain, which is publicly available. Thus, the Bitcoin network 
provides confirmation against double-spending by memorializing every 
transaction in the Bitcoin Blockchain, which is publicly accessible and 
downloaded in part or in whole by all users of the Bitcoin network 
software program.
    The process by which bitcoin are created and bitcoin transactions 
are verified is called mining. To begin mining, a user, or ``miner,'' 
can download and run a mining ``client,'' which, like regular Bitcoin 
network software programs, turns the user's computer into a ``node'' on 
the Bitcoin network, and in this case has the ability to validate 
transactions and add new blocks of transactions to the Blockchain.
    Miners, through the use of the bitcoin software program, engage in 
a set of prescribed complex mathematical calculations in order to 
verify transactions and compete for the right to add a block of 
verified transactions to the Bitcoin Blockchain and thereby confirm 
bitcoin transactions included in that block's data. The miner who 
successfully adds a block of transactions to the Blockchain is rewarded 
by a grant of bitcoin. The supply of bitcoin is programmatically 
limited to 21 million bitcoin.
    Confirmed and validated bitcoin transactions are recorded in blocks 
added to the Bitcoin Blockchain. Each block contains the details of 
some or all of the most recent transactions that are not memorialized 
in prior blocks, as well as a record of the award of bitcoin to the 
miner who added the new block. Each unique block can only be solved and 
added to the Bitcoin Blockchain by one miner; therefore, all individual 
miners and mining pools on the Bitcoin network must engage in a 
competitive process of constantly increasing their computing power to 
improve their likelihood of solving for new blocks. As more miners join 
the Bitcoin network and its processing power increases, the Bitcoin 
network adjusts the complexity of a block-solving equation to maintain 
a predetermined pace of adding a new block to the Bitcoin Blockchain 
approximately every ten minutes.
Bitcoin Market and Bitcoin Exchanges
    In addition to using bitcoin to engage in transactions, investors 
may purchase and sell bitcoin to speculate as to the value of bitcoin 
in the bitcoin market, or as a long-term investment to diversify their 
portfolio. The value of bitcoin

[[Page 23128]]

within the market is determined, in part, by the supply of and demand 
for bitcoin in the bitcoin market, market expectations for the adoption 
of bitcoin by individuals, the number of merchants that accept bitcoin 
as a form of payment and the volume of private end-user-to-end-user 
transactions.
    Research conducted by Bitwise Index Services indicates that the 
vast majority of spot trading volume of bitcoin takes place on ten 
exchanges, although a number of other smaller exchanges exist as well. 
Bitcoin exchanges operate websites designed to permit investors to open 
accounts with the exchange and then purchase and sell bitcoin.
    As with conventional stock exchanges, an investor opening a trading 
account must deposit an accepted government-issued currency into their 
account with the exchange, or a previously acquired digital asset, 
before they can purchase or sell assets on the exchange. The process of 
establishing an account with a bitcoin exchange and trading bitcoin is 
different from the process of users sending bitcoin from one bitcoin 
address to another bitcoin address to pay for goods and services. This 
latter process is an activity that occurs wholly within the confines of 
the Bitcoin network, while the former is an activity that occurs 
entirely on private websites.
    According to the Registration Statement, Bitwise Index Services' 
research has led it to believe that the bitcoin market has matured 
significantly in recent years. In particular, Bitwise Index Services 
believes that arbitrage on bitcoin exchanges (discussed below) has 
improved significantly since the introduction of bitcoin futures in 
December 2017, which fundamentally transformed the bitcoin market by 
creating a two-sided market and easy hedging for the first time. In 
addition, subsequent to the introduction of bitcoin futures, in early 
2018, a large number of sophisticated market makers entered the bitcoin 
market, applying large balance sheets and tech-enabled trading 
platforms that further improved the quality of the market. By summer 
2018, most major market makers were either present in the bitcoin 
market or actively exploring the space. In addition, over the course of 
2018, a significant and efficient short lending market in bitcoin 
developed, with volume growing over the course of the year.
    Bitwise Index Services believes that the launch of futures, the 
arrival of major market makers, and the development of lending combined 
to dramatically improve the efficiency of the bitcoin market in 2018, 
creating a dynamic, institutional-quality, two-sided market for the 
first time. While further developments may be incrementally beneficial 
to the market, Bitwise Index Services believes that the spot bitcoin 
market today operates with an efficiency that matches or exceeds that 
of other major financial markets.
    As discussed in more detail below, the Trust will not directly 
purchase or sell bitcoin. Instead, Authorized Participants will deliver 
bitcoin to the Trust in exchange for Shares of the Trust, and the Trust 
will deliver bitcoin to Authorized Participants when those Authorized 
Participants redeem Shares of the Trust. The Trust will use ten spot 
exchanges that the Sponsor and Bitwise Index Services believe represent 
substantially all of the economically significant bitcoin trading 
volume in the world (outside of capital-controlled countries) in order 
to derive the Bitwise Daily Bitcoin Reference Price, which it will then 
use to price its Net Asset Value (``NAV'') at the end of every business 
day.
    Authorized Participants will have the option of purchasing and 
selling bitcoin used in Creation Basket transactions with the Trust 
either on bitcoin exchanges or in the ``over-the-counter'' (``OTC'') 
markets. Over-the-counter trading of bitcoin is generally accomplished 
via bilateral agreements on a principal-to-principal basis. All risks 
and issues related to creditworthiness are between the parties directly 
involved in the transaction.
The Structure and Operation of the Trust Was Designed To Protect 
Investors and Satisfy Commission Requirements for Bitcoin-Based 
Exchange Traded Products
    The Registration Statement and the Sponsor's submission to the 
Commission in connection with this filing,\15\ seek to explain how the 
structure and operation of the Trust is designed to protect investors 
and to respond to the concerns the Commission has raised and the 
requirements that must be satisfied by any bitcoin-based exchange-
traded product set forth in the ``Order Setting Aside Action by 
Delegated Authority and Disapproving a Proposed Rule Change, as 
Modified by Amendments No. 1 and 2, to List and Trade Shares of the 
Winklevoss Bitcoin Trust'' (the ``Winklevoss Order'') \16\ and the 
``Staff Letter: Engaging on Fund Innovation and Cryptocurrency-related 
Holdings'' (the ``Staff Letter'').\17\
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    \15\ See Bitwise Asset Management, Presentation to the U.S. 
Securities and Exchange Commission, dated March 19, 2019, attached 
to Memorandum from the Division of Trading and Markets regarding a 
March 19, 2019 meeting with representatives of Bitwise Asset 
Management, Inc., NYSE Arca, Inc., and Vedder Price P.C., available 
at https://www.sec.gov/comments/sr-nysearca-2019-01/srnysearca201901-5164833-183434.pdf. This document is referred to in 
this filing as the ``Bitwise Study.''
    \16\ See Securities Exchange Act Release No. 83723 (July 26, 
2018), 83 FR 37579 (August 1, 2018) (SR-BatsBZX-2016-30) (Order 
Setting Aside Action by Delegated Authority and Disapproving a 
Proposed Rule Change to List and Trade Shares of the Winklevoss 
Bitcoin Trust).
    \17\ See letter dated January 18, 2018 from Dalia Blass, 
Director, Division of Investment Management, Commission, to Paul 
Schott Stevens, President & CEO Investment Company Institute and 
Timothy W. Cameron, Asset Management Group--Head, Securities 
Industry and Financial Markets Association.
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    The Commission has outlined two ways that a Rule 19b-4 filing 
relating to a bitcoin exchange-traded product can satisfy the concerns 
outlined in the Winklevoss Order and in particular the concerns 
regarding potential market manipulation of the underlying market. 
Bitwise believes these Commission concerns are addressed by 
demonstrating that:
    (1) Unique Resistance: The bitcoin market is uniquely resistant to 
market manipulation and fraudulent activity; and
    (2) Surveillance Sharing: The listing exchange has entered into a 
surveillance sharing agreement with a regulated market of significant 
size in bitcoin or derivatives on bitcoin.
    Historically, the existence of a surveilled market has been the 
primary consideration regarding addressing potential market 
manipulation, as the Commission stated when discussing its past 
approval of gold bullion exchange-traded products (``ETPs'') in the 
Winklevoss Order.\18\
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    \18\ See Winklevoss Order at note 216 and accompanying text.
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    The Sponsor believes that the gold market is substantially similar 
to the bitcoin market in all respects that are critically important 
from the perspective of the federal securities laws. That is, the 
bitcoin market (and the Trust specifically) is uniquely resistant to 
manipulation, and there is a significant, regulated and surveilled 
market for bitcoin futures.
The ``Real'' Market for Bitcoin
    The Sponsor represents that bitcoin is a globally fungible 
commodity with low transaction costs, near-zero transportation costs 
that allows nearly instantaneous transportation to any location around 
the world, and low-to-zero storage costs, as follows:
     Globally Fungible Commodity: A bitcoin is the same 
anywhere around the world. Unlike wheat, oil or gold, there

[[Page 23129]]

are no varieties, purities, or geographically specific delivery 
locations for bitcoin.
     Low Transaction Costs: The median spread for bitcoin 
traded on Coinbase Pro, a leading bitcoin exchange, in the month of 
March 2019 was $0.01, with each bitcoin valued at approximately $5,000. 
This makes bitcoin one of the most tightly quoted financial instruments 
in the world.
     Near-Zero Transportation Costs: Unlike physical 
commodities, there is virtually no cost to transport bitcoin anywhere 
in the world, and that transportation can occur nearly instantly.
     Low-To-Zero Storage Costs: Bitcoin can safely be stored 
with established, regulated third-party custodians at a cost that 
ranges from 0% to 1.5% a year.
    These four factors would, in isolation, suggest that the bitcoin 
market should be uniquely orderly and efficient, with tight spreads and 
nearly perfect arbitrage between prices on different exchanges. 
Unfortunately, in practice, many perceive that the market for bitcoin 
as disorderly and inefficient, with many unregulated operators running 
crypto ``exchanges'' from unknown domiciles.
    Bitwise believes that this perception derives from the fact that 
leading data aggregators, including those cited by national media 
organizations like The New York Times, The Wall Street Journal and 
Barron's, have reported volume, price and trading data for bitcoin that 
includes an overwhelming percentage of volume that is fake and/or non-
economic in nature. As discussed further below, Bitwise's research 
concludes that when fake and/or non-economic data is removed, the 
remaining or ``real'' market for bitcoin is significantly smaller, more 
orderly and more regulated than commonly understood, and that, with 
that understanding, this filing should squarely address the concerns 
laid out by the Commission in the Winklevoss Order.
Bitwise's Analysis of the Reported Market for Bitcoin Trading
    Bitwise conducted a thorough, data-driven analysis of the spot 
market for bitcoin from March 4, 2019 through March 8, 2019.\19\ 
Bitwise analyzed all exchanges reporting more than $1 million in 
average daily trading volume for bitcoin-fiat and bitcoin-stablecoin 
pairs to the popular data aggregator CoinMarketCap.com, which yielded 
81 exchanges with approximately $6 billion in average daily volume. 
Bitwise deliberately utilized a short time period to both showcase that 
fake volume is a current problem impacting the bitcoin market and 
because, in its experience, exchanges change the algorithms driving how 
they fake volume over time, which obscures the results of certain data-
driven analyses over longer periods.
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    \19\ See note 15, supra.
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    The Bitwise Study analyzed all purportedly significant bitcoin 
exchanges and initially found several widespread, superficial 
indicators of fake or non-economic trading volume. These indicators 
include the following.
     Perfectly paired buy and sell orders. Bitwise does not 
believe that actual trading on exchanges generally result in perfectly-
consistent alternating buy and sell orders of roughly equal size, but 
nonetheless exchanges exhibited this pattern in their data.
     Spread sizes. Bitwise does not believe that there ought to 
be relatively large reported spreads between bid and ask prices 
exhibited on exchanges that report a large volume of trades in 
comparison to other bitcoin exchanges with lower reported volume, 
absent clear economic explanations (tick size, fees, etc.), but 
exchanges with large amounts of claimed volume showed spreads that were 
100X, 1000X or more the size of spreads on certain exchanges with much 
lower levels of volume.
     Real-World Footprint. Bitwise does not believe that 
exchanges with large reported amounts of volume would typically exhibit 
relatively small real-world footprints, including low web traffic, few 
known employees, minimal social media presence and limited or no 
fundraising or capitalization information, but it found many exchanges 
that exhibited these characteristics.
     Unexplained periods of no trading. Bitwise found that 
certain exchanges with large reported volume nonetheless exhibited 
multiple hours and days with zero volume that are not correlated with 
business hours, volatility, up time, or other factors.
     Monotonic trading volume. Bitwise found that some 
exchanges reported relatively large amounts of volume in which a 
roughly identical volume is reported every hour of every day, 
regardless of price movements, news, waking hours, weekends, or other 
real-world factors.
    Given these indications, Bitwise created a computer program for 
collecting or ``scraping'' data across different bitcoin exchanges, 
which collected and stored both the order book and recent trades for 
all exchanges reporting significant volume, four times each second. 
Bitwise analyzed data from these 81 different bitcoin exchanges and 
concluded, for reasons outlined below, that 95% of heretofore reported 
volume is either fake or non-economic trading. Bitwise estimates that 
the real total average daily bitcoin volume is approximately $273 
million, and that this volume is more regulated, more U.S.-focused and 
more orderly than perceived.
    In separating exchanges that have real vs. non-economic 
transactions, Bitwise considered the following data characteristics:
    [ssquf] Trade Size Histograms. Bitwise's computer program can 
produce trade size ``histograms'' that show the percentage of volume 
that occur at particular trade sizes over a specified period. Trade 
size histograms for the exchanges that pass all of its data tests show 
consistent patterns that reflect trading that Bitwise believes 
naturally occurs. Such patterns include volume declining as trade size 
increases and a greater-than-random distribution of volume at whole 
bitcoin sizes. These patterns are roughly consistent in size and shape 
across all ten exchanges that pass all of Bitwise's data tests. Trade 
size histograms from other exchanges, on the other hand, reflect 
patterns that were idiosyncratic and often had patterns that were 
transparently programmatic, such as bell curve-like distributions with 
no apparent reason for such a clustering of trade sizes, and increasing 
volume for larger trade sizes rather than the decaying trend mentioned 
above. Most of these exchanges showed no peaks at whole bitcoin sizes.
     Volume Spike Analysis. Bitwise's computer program can 
produce charts that show volume ``spikes,'' or periods of significantly 
increased transaction volume, across any exchange. Because the bitcoin 
market is a globally integrated market for a fungible good, Bitwise 
believed a priori that, with some limitations for time zones and 
holidays, volume on different exchanges would rise and fall 
concurrently in response to the same events or changes in market 
conditions.
     This pattern played out as expected among the ten 
exchanges that passed all data tests and that Bitwise believes 
constitutes substantially all of the real global spot trading volume 
for bitcoin, but was noticeably absent among other exchanges, which 
either had no discernible volume spikes or had patterns that were 
wholly idiosyncratic and did not repeat on other exchanges.
    [ssquf] Spread Patterning Analysis. The spread on an exchange with 
real volume will have two key features that Bitwise

[[Page 23130]]

believes it can identify through a data driven analysis.
     First, Bitwise believes there should be a generally 
rational relationship between the volume on the exchange and the size 
of the spread (subject to limitations put in place at the exchange 
level, including the tick size and any exchange-level fees). In other 
words, exchanges with high volume should generally have smaller spreads 
than exchanges with low volume, and in a globally integrated market for 
a fungible good, those spreads should be competitive with other 
exchanges. Investors may tolerate a marginally higher spread on a 
particular exchange due to levels of comfort, design, user experience, 
regulatory status or other factors, but they are unlikely to trade 
significantly on exchanges with spreads that are many multiples larger 
than other available exchanges. In analyzing the data, Bitwise found 
many exchanges reporting very high levels of volume that nonetheless 
reported average spreads that were 1,000%-35,000% higher than the 
spreads reported on other well-established, regulated and well-
capitalized exchanges that passed all of Bitwise's data tests.
     Second, as with volume, spreads change over time in 
reaction to market developments. Bitwise found that many exchanges 
exhibited spread patterns over time that revealed artificial, 
programmatic drivers, including spreads that unnaturally anchor on 
arbitrary high dollar levels (i.e., Bitwise found examples of exchanges 
with spreads that would consistently base at a random dollar value (for 
example, $10), and sometimes would change that resting mode spread in a 
step function (for example, going from a $10 mode spread over multiple 
days to a $7.50 mode spread over multiple days without a rational 
explanation owing to fees or other factors).
    As a result of its research, Bitwise believes that, as of March 8, 
2019, as stated earlier, the real daily spot volume of the bitcoin 
market is approximately $273 million, and not the $6 billion that is 
commonly reported. It further believes that this volume is spread 
across ten exchanges that are located or domiciled in developed 
markets.
    Bitwise believes that this finding is significant and that it leads 
to the following key conclusions:
     The smaller trade volume is more aligned with a priori 
expectations for bitcoin turnover, and is still sufficiently robust to 
support liquidity in the Trust, as discussed below.
     The real market for bitcoin appears to be orderly and 
efficient, with effective arbitrage in place and robust price discovery 
shared across multiple exchanges, as discussed below.
     The regulated and surveilled bitcoin futures market is 
much larger in comparison to the spot bitcoin market than is commonly 
understood, with significant implications, as discussed below.
The Real Market for Bitcoin Is Extremely Efficient, Well-Arbitraged and 
More Regulated Than Commonly Understood
    As described above, Bitwise found that just ten exchanges passed 
all of its data tests. It believes that these ten exchanges represent 
substantially all of the real global spot market for bitcoin, and notes 
that these exchanges are more established, more likely to be located in 
developed markets, more regulated, and more likely to have 
sophisticated market surveillance tools in place than the broader set 
of exchanges reporting significant volume. Whereas most of the broader 
set of analyzed exchanges have no known domicile, all ten of the 
exchanges that passed Bitwise's data tests are domiciled or based in 
developed markets, including the U.S., the UK, Malta and Japan. Nine of 
the ten exchanges are regulated by the U.S. Department of Treasury's 
FinCEN division as Money Services Businesses, and six have a BitLicense 
from the New York State Department of Financial Services.\20\ Finally, 
five of the ten exchanges have either robust internal (one) or robust 
third-party (four) market surveillance tools in place to monitor, 
report and correct for abusive trading behavior.\21\
---------------------------------------------------------------------------

    \20\ See Exhibit 3 [to Amendment No. 1], Item 1. As of April 26, 
2019, Bitfinex was removed by the Bitwise Crypto Index Committee 
from the exchanges contributing prices to deriving the Bitwise Daily 
Bitcoin Reference Price pursuant to the New York Attorney General's 
claims towards iFinex Inc., operator of Bitfinex. As a result, the 
exchanges contributing to the Reference Price was reduced from ten 
to nine.
    \21\ See Exhibit 3 [to Amendment No. 1], Item 2.
---------------------------------------------------------------------------

    Bitwise acknowledges that the regulatory status of these exchange 
platforms is not co-extensive to the obligations of and oversight for 
national securities exchanges or futures exchanges, but notes that 
these platforms are required to comply with particular obligations and 
types of regulatory compliance that provide business oversight and 
regulatory compliance requirements.
    For instance, the nine exchanges that are regulated by the U.S 
Department of Treasury's FinCEN division as Money Services Businesses 
are charged with various responsibilities including: \22\
---------------------------------------------------------------------------

    \22\ See BSA Requirements for MSBs, FinCEN website: https://www.fincen.gov/bsa-requirements-msbs.
---------------------------------------------------------------------------

     Identifying people with ownership stakes or controlling 
roles in the MSB;
     Establishing a formal Anti-Money Laundering (AML) policy 
in place with documentation, training, independent review, and a named 
compliance officer;
     Having strict customer identification and verification 
policies and procedures;
     Filing Suspicious Activity Reports (SARs) for suspicious 
customer transactions;
     Filing Currency Transaction Reports (CTRs) for cash-in or 
cash-out transactions greater than $10,000; and
     Maintaining a five-year record of currency exchanges 
greater than $1,000 and money transfers greater than $3,000.
    The six exchanges that are regulated by the New York State 
Department of Financial Services (``NYDFS'') under the BitLicense 
program have additional obligations, including the following: \23\
---------------------------------------------------------------------------

    \23\ See ``New York's Final ``BitLicense'' Rule: Overview and 
Changes from July 2014 Proposal,'' June 5, 2015, Davis Polk, 
available at https://www.davispolk.com/files/new_yorks_final_bitlicense_rule_overview_changes_july_2014_proposal.pdf.
---------------------------------------------------------------------------

     Submission of audited financial statements including 
income statements, statement of assets/liabilities, insurance, and 
banking.
     Capitalization requirements set at NYDFS's discretion.
     Full reserves of custodian assets selling/encumbering 
prohibited.
     Fingerprints and photographs of employees with access to 
customer funds.
     Qualified Chief Information Security Officer and annual 
penetration testing/audits.
     Documented business continuity and disaster recovery plan, 
independently tested annually.
     Independent exam by NYDFS.
     Implementing measures designed to effectively detect, 
prevent, and respond to fraud, attempted fraud, and similar wrongdoing, 
including market manipulation, and to monitor, control, investigate and 
report back to the New York State Department of Financial Services any 
wrongdoing.\24\
---------------------------------------------------------------------------

    \24\ See ``DFS Takes Action to Deter Fraud and Manipulation in 
Virtual Currency Markets,'' available at https://www.dfs.ny.gov/about/press/pr1802071.htm.
---------------------------------------------------------------------------

An Efficient, Well-Arbitraged Market
    The Sponsor believes that, while the bitcoin market is commonly 
perceived to be disorderly and inefficient, when focused only on the 
ten exchanges

[[Page 23131]]

referenced above, which it believes represent substantially all of the 
real spot trading volume in bitcoin, the bitcoin market is shown to be 
extraordinarily efficient, well-arbitraged, resilient and robust.
    Bitwise notes that, from January 1, 2018, through March 17, 2019, 
the price of bitcoin on each of the ten exchanges has traded almost 
perfectly in-line.\25\
---------------------------------------------------------------------------

    \25\ See Exhibit 3 [to Amendment No. 1], Item 3.
---------------------------------------------------------------------------

    The Bitwise Study further showed that the average deviation from 
the aggregate price from the ten exchanges ranged from 0.13% to 0.25% 
over this time period. It noted that this average deviation is well 
within the expected arbitrage band between these exchanges; many of 
these exchanges charge fees of up to 0.30% for trading, and one cannot 
expect average deviations below these exchanges to be arbitraged 
away.\26\
---------------------------------------------------------------------------

    \26\ See Exhibit 3 [to Amendment No. 1], Item 4.
---------------------------------------------------------------------------

    In addition, the Bitwise Study showed that the existence of 
sustained deviations--defined as differences in price greater than 1% 
that lasted for more than 100 seconds--were extremely rare over the 
time period studied. In the histogram attached as Exhibit 3 [to 
Amendment No. 1], each sustained deviation is marked as a thin white 
line.\27\
---------------------------------------------------------------------------

    \27\ See Exhibit 3 [to Amendment No. 1], Item 5.
---------------------------------------------------------------------------

    In sum, Bitwise believes that the Bitwise Study shows that the real 
market for bitcoin is extremely efficient and that arbitrage exists 
between and among the ten exchanges with real volume.
    Bitwise further believes, as discussed above, that the efficiency 
of the market has improved dramatically over the past eighteen months. 
Bitwise further believes that the market is approaching the practical 
limit of these improvements, in that prices among different exchanges 
are nearly perfectly arbitraged, spreads are incredibly tight, and the 
market is liquid on a twenty four hour/seven day a week basis.
Protections Against Market Manipulation Specific to the Trust's Design
    Bitwise believes that the specific design of the Trust's NAV 
calculation process, as described below, its exclusive use of in-kind 
creation/redemptions, and its decision to accrue all fees in bitcoin 
support its efforts to meet the concerns set forth in the Winklevoss 
Order.
Net Asset Value
    According to the Registration Statement, the Trust's per Share NAV 
will be calculated by dividing the value of the net assets of the Trust 
(i.e., the value of its total assets less total liabilities) by the 
total number of Shares outstanding. The Trust's NAV will be calculated 
on each trading day on the Exchange. The Trust will compute its NAV as 
of 4:00 p.m. E.T. The Trust's NAV will be calculated only once each 
trading day. The Trust's daily NAV may be found at the Trust's website.
    In calculating the NAV, the Trust relies on the Bitwise Daily 
Bitcoin Reference Price, which is produced once per day at 4:00 p.m. 
E.T. using the methodology outlined below.
    First, Bitwise tracks a universe of over 200 on-line cryptocurrency 
exchanges that purport to offer trading on bitcoin and other 
cryptocurrencies. Bitwise eliminates a significant portion of the 
exchanges based on a number of factors. Those factors include, but are 
not limited to:
     Eliminating exchanges that are domiciled in emerging 
market countries;
     Eliminating exchanges domiciled in countries that have 
capital controls;
     Eliminating exchanges that lack functioning and stable 
Application Programing Interfaces (``API'') for the transmission of 
price and volume data;
     Eliminating exchanges which, in the judgment of Bitwise, 
have issues with significant downtime, problems with customers 
withdrawal abilities, or known security issues;
     Eliminating exchanges which, in the judgement of Bitwise, 
are or may be subject to extraordinary legal or regulatory activity; 
and
     Eliminating exchanges that do not have at least $1 million 
in average daily trading volume for bitcoin-fiat or bitcoin-stablecoin 
trading pairs over the past calendar quarter.\28\
---------------------------------------------------------------------------

    \28\ The volume requirement described in the last bullet in the 
list above may be waived by Bitwise Index Services for otherwise 
qualified exchanges if they are in fact being currently used to 
price publicly-listed cryptocurrency investment products such as 
futures contracts, non-U.S. exchange-traded funds and non-U.S. 
exchange-traded notes.
---------------------------------------------------------------------------

    In addition, on no less than a quarterly basis, the Bitwise Crypto 
Index Committee (the ``Committee'') reviews the actual published 
trading data of all exchanges that pass the above-mentioned screens. 
This further analysis includes bid/ask spreads, actual claimed executed 
trades with price and volume, and any other factors the Committee deems 
relevant. Exchanges that show persistent signs of artificial or 
inflated volume may be removed from the list of exchanges contributing 
prices to the Bitwise Daily Bitcoin Reference Price and the Bitwise 
Real-Time Bitcoin Price (the Bitwise Daily Bitcoin Reference Price, or 
``Bitcoin Price,'' is published once daily based on the procedures 
described herein and used for NAV calculation purposes, while the 
``Bitwise Real-Time Bitcoin Price'' is published continuously for 
indicative purposes).
    As a result of this screening process, Bitwise's list of exchanges 
currently used to price the Bitwise Daily Bitcoin Reference Price 
narrows from over 200 considered exchanges down to ten.\29\ Bitwise 
believes that these exchanges currently account for substantially all 
of the real, spot global volume of bitcoin traded on exchanges with 
economic intent, excluding capital-controlled countries, although both 
the number of exchanges and the percentage of global volume they 
represent is subject to change over time.
---------------------------------------------------------------------------

    \29\ See note 20, supra.
---------------------------------------------------------------------------

    The Bitwise Daily Bitcoin Reference Price relies on the prices and 
volume reported on these ten exchanges. To calculate the price, Bitwise 
examines six five-minute periods leading up to 4:00 p.m. E.T. It then 
calculates an equal-weighted average of the volume-weighted median 
price of these six five-minute periods.\30\
---------------------------------------------------------------------------

    \30\ See Exhibit 3 [to Amendment No. 1], Item 6.
---------------------------------------------------------------------------

    The Sponsor believes these procedures are designed to protect the 
Bitwise Daily Bitcoin Reference Price and therefore the Trust's NAV 
from potential attempts at manipulation. Specifically, the Sponsor 
believes that using six consecutive five-minute segments over a thirty-
minute period means malicious actors would need to sustain efforts to 
manipulate the market over an extended period of time, or would need to 
replicate efforts multiple times, potentially triggering review by 
exchange trading platforms, market participants, and regulators.
    In addition, the use of a median price eliminates the ability of 
outlier prices to impact the NAV, as it systematically excludes those 
prices from the NAV calculation.\31\
---------------------------------------------------------------------------

    \31\ See Exhibit 3 [to Amendment No. 1], Item 7.
---------------------------------------------------------------------------

    The use of a volume-weighted median (as opposed to a traditional 
median) protects against attempts to manipulate the NAV by executing a 
large number of low-dollar trades, because, any manipulation attempt 
would have to involve a majority of global spot bitcoin volume in a 
five-minute window to have any influence on the NAV.\32\
---------------------------------------------------------------------------

    \32\ See Exhibit 3 [to Amendment No. 1], Item 8.
---------------------------------------------------------------------------

    The use of ten exchanges \33\ representing substantially all of the 
real global spot volume for bitcoin also mitigates against 
idiosyncratic exchange risk, as the failure of any individual

[[Page 23132]]

exchange will not materially impact pricing for the Trust. It also 
allows the Administrator to calculate the NAV in a manner that 
significantly deters manipulation. The fact that there are multiple 
exchanges contributing prices to the NAV also makes manipulation more 
difficult in a well-arbitraged and fractured market, as a malicious 
actor would need to manipulate multiple exchanges simultaneously or 
dramatically skew the historical distribution of volume between the 
various exchanges in order to impact the NAV. Capturing substantially 
all of the spot trading in bitcoin further increases the difficulty, 
since significantly more capital would be required in any attempt to 
influence the NAV and attempts to profit from that manipulation would 
be difficult.
---------------------------------------------------------------------------

    \33\ See note 20, supra.
---------------------------------------------------------------------------

    Bitwise notes that the methodology for the Bitwise Daily Bitcoin 
Reference Price is similar in many respects to the CME CF Bitcoin 
Reference Rate, which is the rate at which the CME bitcoin futures 
settle.\34\
---------------------------------------------------------------------------

    \34\ Bitwise notes that a detailed analysis on how a volume-
weighted median pricing approach both theoretically and empirically 
protects against potential manipulation is available in the paper 
``Analysis of the CME CF Bitcoin Reference Rate and CME CF Bitcoin 
Real Time Index'' by Andrew Paine and William J. Knottenbelt of the 
Imperial College Centre for Cryptocurrency Research and Engineering, 
November 14, 2016.
---------------------------------------------------------------------------

Indicative Fund Value
    In order to provide updated information relating to the Trust for 
use by investors, market professionals and other market data vendors, 
the Exchange will calculate an updated ``Intraday Indicative Value'' 
(``IIV''). The IIV will be calculated by using the prior day's closing 
net assets of the Trust as a base and updated throughout the Exchange's 
Core Trading Session of 9:30 a.m. E.T. to 4:00 p.m. E.T. to reflect 
changes in the most recently reported price level of the Bitwise Real-
Time Bitcoin Price, as reported by Bloomberg, L.P. or another reporting 
service.
    As stated, the Bitwise Real-Time Bitcoin Price is calculated from 
the same exchanges as the Bitwise Daily Bitcoin Reference Rate, and 
also uses a volume-weighted median price methodology. Instead of 
equally weighting prices captured over six five-minute periods, 
however, the Bitwise Real-Time Bitcoin Price uses only the last trade 
on each exchange, and uses the trailing 30-minute volume on those 
exchanges as the weighting factor.
    The IIV will be disseminated on a per Share basis every 15 seconds 
during the Exchange's Core Trading Session and will be widely 
disseminated by one or more major market data vendors during the NYSE 
Arca Core Trading Session.
Creation and Redemption of Shares
    According to the Registration Statement, the Trust intends to 
create and redeem Shares in one or more Creation Baskets. A Creation 
Basket is a block of 25,000 Shares of the Trust. Except when aggregated 
in Creation Units, the Shares are not redeemable securities.
    Only Authorized Participants may purchase and redeem Creation 
Baskets. Authorized Participants must be (1) registered broker-dealers 
or other securities market participants, such as banks and other 
financial institutions, that are not required to register as broker-
dealers to engage in securities transactions described below, and (2) 
the Depository Trust Company (``DTC'') Participants. An Authorized 
Participant is an entity that has entered into an Authorized 
Participant Agreement with the Trust and the Sponsor.
Creation Procedures
    On any business day, an Authorized Participant may place an order 
with the Marketing Agent to create one or more Creation Baskets. For 
purposes of processing both purchase and redemption orders, a 
``business day'' means any day other than a day when the Exchange or 
the New York Stock Exchange is closed for regular trading.
    All creation baskets are processed in-kind. By placing a purchase 
order, an Authorized Participant agrees to deposit bitcoin with the 
Trust. Prior to the delivery of baskets for a purchase order, the 
Authorized Participant must also have wired to the custodian the 
nonrefundable transaction fee due for the purchase order. Authorized 
Participants may not withdraw a creation request. If an Authorized 
Participant fails to consummate the foregoing, the order shall be 
cancelled.
Redemption Procedures
    According to the Registration Statement, the procedures by which an 
Authorized Participant can redeem one or more baskets mirror the 
procedures for the creation of creation baskets. On any business day, 
an Authorized Participant may place an order with the Marketing Agent 
to redeem one or more baskets. A redemption order so received will be 
effective on the date it is received in satisfactory form by the 
Marketing Agent (``Redemption Order Date''). The redemption procedures 
allow Authorized Participants to redeem baskets and do not entitle an 
individual shareholder to redeem any shares in an amount less than a 
Creation Basket, or to redeem baskets other than through an Authorized 
Participant.
    By placing a redemption order, an Authorized Participant agrees to 
deliver the baskets to be redeemed through DTC's book-entry system to 
the Trust not later than noon E.T. on the second business day following 
the effective date of the redemption order. Prior to the delivery of 
the redemption distribution for a redemption order, the Authorized 
Participant must also have wired to the Sponsor`s account at the 
custodian the non-refundable transaction fee due for the redemption 
order. An Authorized Participant may not withdraw a redemption order.
    All redemption orders are processed in-kind. By placing a 
redemption order, an Authorized Participant agrees to receive bitcoin.
    The manner by which redemptions are made is dictated by the terms 
of the Authorized Participant Agreement. If an Authorized Participant 
fails to consummate the foregoing, the order shall be cancelled.
Determination of Redemption Distribution
    The redemption distribution from the Trust will consist of a 
transfer to the redeeming Authorized Participant of an amount of 
bitcoin that is in the same proportion to the total assets of the Trust 
(net of estimated accrued but unpaid fees, expenses and other 
liabilities) on the date the order to redeem is properly received as 
the number of shares to be redeemed under the redemption order is in 
proportion to the total number of shares outstanding on the date the 
order is received. The Sponsor, directly or in consultation with the 
Administrator, determines the requirements for bitcoin that may be 
included in distributions to redeem baskets. The Marketing Agent will 
publish an estimate of the redemption distribution per basket as of the 
beginning of each business day.
Fee Accrual
    The Sponsor proposes to accrue all fees in bitcoin.
The Impact of the Exclusive Use of In-Kind Creations, Redemptions and 
Fee Accruals
    Bitwise believes that the exclusive use of in-kind creations, 
redemptions and fee accruals, in all situations except when the Trust 
is required to liquidate, provides long-term investors in the Trust 
with significant, redundant and strong protection against attempts to 
manipulate the price of bitcoin in such a way as to impact the Bitwise 
Daily

[[Page 23133]]

Bitcoin Reference Rate and therefore the NAV of the Trust.
    That is because, while Bitwise believes that the NAV will 
accurately reflect the globally integrated price for bitcoin, and that 
that price is uniquely resistant to market manipulation, and 
acknowledges that this is important, it gains additional comfort that 
long-term investors in the Trust are protected from short-term attempts 
to manipulate that NAV by the Trust's exclusive use of in-kind 
creations, redemptions and fee accruals, because denominating those 
transactions exclusively in bitcoin ensures that the Trust maintains 
the appropriate amount of bitcoin-per-Share in all scenarios, even if 
the NAV or the Bitwise Daily Bitcoin Reference Price were somehow to be 
manipulated.
How The Trust Meets Standards in the Winklevoss Order
    The preceding information, both about the real nature of the 
bitcoin market and the structure of the Trust, informs the means by 
which Bitwise believes that the Trust meets the concerns and conditions 
set forth in the Winklevoss Order.
    Regarding the first condition--namely, showing that the bitcoin 
market is uniquely resistant to manipulation--Bitwise believes that the 
digital nature of bitcoin makes it unique compared to other commodities 
in three important ways, which combine to provide unique protections 
against attempts to manipulate the market:
    1. Fungibility: As mentioned, unlike other commodities (like oil, 
wheat or even gold), as mentioned, there are no varieties, purities or 
geographical delivery locations for a bitcoin.
    2. Transportability: Bitcoin has no physical manifestation. As a 
result, it can be instantly transported from one location to another, 
anywhere in the world, at a cost approaching zero.
    3. Exchange Tradability: Most commodities trade over-the-counter or 
rely on representative, derivative futures contracts because they lack 
the characteristics listed above. Bitcoin is unique in that the 
commodity itself trades directly on exchange, allowing for open price 
discovery.
    These unique features allow the bitcoin market to be uniquely 
resistant to market manipulation in critical ways.
    For example, Bitiwse [sic] believes that the fact that bitcoin's 
price is set on the open market makes it uniquely resistant to 
manipulation compared to other commodities whose price is set by 
coordinated fix pricing. The Bitwise Study notes that many of the 
largest recent market manipulation scandals have been driven by 
coordinated fix pricing, including those related to London Interbank 
Offered Rate (LIBOR) (2012), Global Forex (2013), Gold Fix (2014), and 
the Australian Bank Bill Swap Rate (ASIC) (2016), among others. Bitwise 
believes that the fact that the bitcoin market engages in price 
discovery in an open, transparent and online setting introduces certain 
risks that must be considered and controlled through the careful design 
of the Trust, but notes that these risks can be weighed against the 
benefits that accrue to the public, transparent and open nature of that 
price discovery.
    The Bitwise Study and related research also show that the fact that 
bitcoin uniquely has no physical delivery location renders it immune to 
another common form of attempted and successful commodity market 
manipulation. For instance, in May 2011, the U.S. Commodity Futures 
Trading Commission filed suit against three American and international 
trading firms for attempting to manipulate the price of oil by 
cornering or partially cornering the market for oil storage in Cushing, 
Oklahoma.\35\ Cushing is the delivery point for the popular NYMEX WTI 
Crude Oil futures contract, the most liquid crude oil futures contract 
in the world, which is widely seen as the benchmark price for WTI crude 
oil in the U.S. While the price of the WTI contract is used as a proxy 
for the price of all WTI crude, just 5%-10% of U.S. crude oil storage 
is available in Cushing. This disconnect between the size of the 
storage market for the reference price contract and the much larger 
real market for WTI crude oil creates an opportunity for individuals 
and firms to attempt to profit from artificially manipulating the 
relatively small market for crude oil storage while holding broader 
positions in the underlying physical commodity. Because bitcoin itself 
trades on exchanges and does so at a globally integrated price, these 
types of attempts at market manipulation are not possible, because 
there is no narrowly constructed representative price with a physical 
storage limitation that can be manipulated.
---------------------------------------------------------------------------

    \35\ See ``U.S. Suit Sees Manipulation of Oil Trades'' by Graham 
Bowley, May 24, 2011, The New York Times, available at https://www.nytimes.com/2011/05/25/business/global/25oil.html?ref=todayspaper.
---------------------------------------------------------------------------

    Other factors further contribute to the unique resistance to market 
manipulation that exists in the bitcoin market. For instance, as 
described above, the fact that bitcoin is fungible and transportable 
means that bitcoin trades at a single price on real exchanges around 
the world, and that extremely effective arbitrage is in place between 
those exchanges. Because there is a single global price for bitcoin, 
any attempt to manipulate the market must involve a non-trivial amount 
of the total global liquidity, which makes it more difficult to achieve 
and significantly more risky to attempt.
    In addition, the fact that bitcoin itself (and not some derivative 
of it) is traded on exchanges means profiting from any such market 
manipulation would be difficult. The Trust's NAV captures substantially 
all of the spot bitcoin trading volume in the world, and the Trust's 
NAV is designed in a volume-weighted way, meaning attempts to 
manipulate must involve a majority of trading volume over a significant 
period of time.
    Further, Bitwise believes that the fact that bitcoin is fungible 
and transportable has allowed a distributed market to emerge, which 
provides unique resistance to market manipulation given the factors 
identified above. Bitwise's research notes that no single exchange 
represents the majority of real trading volume on the bitcoin market, 
and that volume is spread amongst ten different exchanges. This 
contributes to bitcoin's unique resistance to market manipulation, as 
any attempt to manipulate the market must either be coordinated 
synchronously across multiple exchanges or must involve a significant 
spike of volume on a single exchange (an action that would trigger 
review in the Trust's NAV process). Bitwise notes that there is a 
carefully designed lag between the strike time of the NAV (4:00 p.m. 
E.T.) and the time that the NAV is distributed (approximately 5:30 p.m. 
E.T.), which allows time for Bitwise Index Services to review 
contributed prices in both an algorithmic and manual way to ensure that 
no anomalous behavior exists.
    Bitwise further believes that the unique design of the Bitwise 
Daily Bitcoin Reference Rate, and, therefore, the NAV--as well as the 
Trust's exclusive use of in-kind creations and redemptions, and its 
decision to accrue all fees in bitcoin--provide additional unique 
resistance to any short-term attempts at market manipulation for the 
reasons described above.
A Significant, Regulated and Surveilled Market Exists and Is Closely 
Connected With Spot Market for Bitcoin
    In the Winklevoss Order, the Commission laid out both the need for 
and the definition of a surveilled market of significant size. 
Specifically, the Commission explained that:


[[Page 23134]]


[for the] commodity-trust ETPs approved to date for listing and 
trading, there has been in every case at least one significant, 
regulated market for trading futures on the underlying commodity--
whether gold, silver, platinum, palladium, or copper--and the ETP 
listing exchange has entered into surveillance-sharing agreements 
with, or held Intermarket Surveillance Group membership in common 
with, that market.\36\
---------------------------------------------------------------------------

    \36\ Winklevoss Order at note 209 and accompanying text.

    Further, the Commission stated that the Commission interprets terms 
---------------------------------------------------------------------------
``significant market'' and ``market of significant size'' to include:

a market (or group of markets) as to which (a) there is a reasonable 
likelihood that a person attempting to manipulate the ETP would also 
have to trade on that market to successfully manipulate the ETP, so 
that a surveillance-sharing agreement would assist the ETP listing 
market in detecting and deterring misconduct, and (b) it is unlikely 
that trading in the ETP would be the predominant influence on prices 
in that market.\37\
---------------------------------------------------------------------------

    \37\ Winklevoss Order, 83 FR at 37594.

    Bitwise believes that, in light of a better understanding of the 
true size of the spot bitcoin market, the combined CME/CFE futures 
market represents a large, surveilled and regulated market, as required 
above. Over the time period covered in the Bitcoin Study, the average 
daily volume of the bitcoin futures market was $91 million. While this 
appears tiny in relation to the reported volume of $6 billion, it is 
meaningful in relation to the actual volume of $273 million.\38\
---------------------------------------------------------------------------

    \38\ See Exhibit 3 [to Amendment No. 1], Item 9.
---------------------------------------------------------------------------

    In addition, the CME futures market is larger than all but one spot 
bitcoin exchange and nearly as large as the largest bitcoin 
exchange.\39\
---------------------------------------------------------------------------

    \39\ See Exhibit 3 [to Amendment No. 1], Item 10.
---------------------------------------------------------------------------

    The Bitwise Study found that the prices on the CME and CFE futures 
markets are closely aligned with the Bitwise Daily Bitcoin Reference 
Price on a once-a-day basis, and with the Bitwise Real-Time Bitcoin 
Price on an intraday basis. This follows logically, given that the CME 
futures settlement price is based on prices pulled from four of the ten 
exchanges that contribute to the Bitwise Daily Bitcoin Reference Price 
and the Bitwise Real-Time Bitcoin Rate, and the CFE futures settlement 
price is based on prices pulled from one of the ten exchanges that 
contribute to the Bitwise Daily Bitcoin Reference Price and the Bitwise 
Real-Time Bitcoin Rate. The tightness-of-fit between the two prices is 
limited by the term structure of the futures contract and the 
asymmetric cost of hedging a futures position--it is less expensive to 
hedge a short position in bitcoin futures than it is to hedge a long 
position in bitcoin futures. Nonetheless, the connection between the 
two prices is strong and arbitrage exists between the two prices.
    Given the significant size of the CME and CFE futures markets (or 
the CME futures market in isolation), and the close relationship in 
prices between the derivatives market and the spot market, there is a 
reasonable likelihood that a person attempting to manipulate the ETP 
would also have to trade on that market to successfully manipulate the 
ETP, since arbitrage between the derivative and spot markets would tend 
to counter an attempt to manipulate the spot market alone. As a result, 
the Exchange's ability to obtain information regarding trading in the 
Shares and futures from markets and other entities that are members of 
the Intermarket Trading Group (``ISG''), which includes the CME and 
CFE, would assist the ETP listing market in detecting and deterring 
misconduct.
Impact on the Spot Market for Bitcoin
    In the Winklevoss Order, the Commission noted that it wanted to see 
a market where ``it is unlikely that trading in the ETP would be the 
predominant influence on prices in that market''.\40\ While future 
inflows to the proposed Trust cannot be predicted, to provide 
comparable data, Bitwise examined total net inflows in the first year 
of existence for two types of ETPs: Commodity ETPs that were first to 
market in the U.S. and blockchain ETFs. Bitwise found that one year net 
inflows ranged from $2 million to approximately $3 billion for the ETPs 
meeting that definition.\41\
---------------------------------------------------------------------------

    \40\ See Winklevoss Order, 83 FR at 37594.
    \41\ See Exhibit 3 [to Amendment No. 1], Item 11.
---------------------------------------------------------------------------

    Given the size of these inflows versus the size of the real bitcoin 
market ($273 million in average daily volume), Bitwise believes that it 
is unlikely that trading in the ETP would become the predominant 
influence on prices in that market.
Conclusion Regarding Standards in the Winklevoss Order
    In summary, the Commission articulated two ways that a proposed 
bitcoin ETP could meet the standards set forth in the Winklevoss Order. 
The Commission explained that the proposed ETP must show either that 
the underlying market for bitcoin is uniquely resistant to market 
manipulation, and/or that a surveilled derivatives market of 
significant size existed alongside that market. Bitwise believes that 
the information presented above attempts to address those concerns, 
showing both the ways in which the bitcoin market (as the first digital 
commodity) is uniquely resistant to market manipulation, and that the 
CME and CFE are large, surveilled and regulated markets that fulfill 
the requirements for surveillance sharing. Bitwise further believes 
that the careful construction of the Bitwise Daily Bitcoin Reference 
Price (and the Bitwise Real-Time Bitcoin Price), and thereby the NAV 
(and IIV), the decision to process all creations and redemptions in-
kind, and the decision to accrue all fees in-kind, provide additional 
protections against attempts to manipulate the spot market for bitcoin.
Availability of Information Regarding Bitcoin
    The NAV for the Trust's Shares will be disseminated daily to all 
market participants at the same time.
    Quotation and last-sale information regarding the Shares will be 
disseminated through the facilities of the CTA. The IIV will be 
available through online information services.
    In addition, the Trust's website will display the applicable end of 
day closing NAV. The daily holdings of the Trust will be available on 
the Trust's website before 9:30 a.m. E.T. The Trust's total portfolio 
composition will be disclosed each business day that NYSE Arca is open 
for trading, on the Trust's website. The Trust's website will also 
include a form of the prospectus for the Trust that may be downloaded. 
The website will include the Shares' ticker and CUSIP information, 
along with additional quantitative information updated on a daily basis 
for the Trust. The Trust's website will include (1) the prior business 
day's trading volume, the prior business day's reported NAV and closing 
price, and a calculation of the premium and discount of the closing 
price or mid-point of the bid/ask spread at the time of NAV calculation 
(``Bid/Ask Price'') against the NAV; and (2) data in chart format 
displaying the frequency distribution of discounts and premiums of the 
daily closing price or Bid/Ask Price against the NAV, within 
appropriate ranges, for at least each of the four previous calendar 
quarters. The Trust's website will be publicly available prior to the 
public offering of Shares and accessible at no charge.
    The spot price of bitcoin as reflected in the Bitwise Daily Bitcoin 
Reference Price will also be available on a 24-hour basis from the 
Trust's website.
Trading Halts
    With respect to trading halts, the Exchange may consider all 
relevant

[[Page 23135]]

factors in exercising its discretion to halt or suspend trading in the 
Shares of the Trust.\42\ Trading in Shares of the Trust will be halted 
if the circuit breaker parameters in NYSE Arca Rule 7.12-E have been 
reached. Trading also may be halted because of market conditions or for 
reasons that, in the view of the Exchange, make trading in the Shares 
inadvisable.
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    \42\ See NYSE Arca Rule 7.12-E.
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    The Exchange may halt trading during the day in which an 
interruption to the dissemination of the IIV occurs.\43\ If the 
interruption to the dissemination of the IIV or the value of the Index 
persists past the trading day in which it occurred, the Exchange will 
halt trading no later than the beginning of the trading day following 
the interruption. In addition, if the Exchange becomes aware that the 
NAV with respect to the Shares is not disseminated to all market 
participants at the same time, it will halt trading in the Shares until 
such time as the NAV is available to all market participants.
---------------------------------------------------------------------------

    \43\ A limit up/limit down condition in the futures market would 
not be considered an interruption requiring the Trust to be halted.
---------------------------------------------------------------------------

Trading Rules
    The Exchange deems the Shares to be equity securities, thus 
rendering trading in the Shares subject to the Exchange's existing 
rules governing the trading of equity securities. Shares will trade on 
the NYSE Arca Marketplace from 4 a.m. to 8 p.m. E.T. in accordance with 
NYSE Arca Rule 7.34-E (Early, Core, and Late Trading Sessions). The 
Exchange has appropriate rules to facilitate transactions in the Shares 
during all trading sessions. As provided in NYSE Arca Rule 7.6-E, the 
minimum price variation (``MPV'') for quoting and entry of orders in 
equity securities traded on the NYSE Arca Marketplace is $0.01, with 
the exception of securities that are priced less than $1.00 for which 
the MPV for order entry is $0.0001.
    Further, NYSE Arca Rule 8.201-E sets forth certain restrictions on 
Equity Trading Permit Holders acting as registered Market Makers in the 
Shares to facilitate surveillance. Under NYSE Arca Rule 8.201-E(g), an 
Equity Trading Permit Holder acting as a registered Market Maker in the 
Shares is required to provide the Exchange with information relating to 
its trading in the underlying commodity, related futures or options on 
futures, or any other related derivatives. Commentary .04 of NYSE Arca 
Rule 11.3-E requires an Equity Trading Permit Holder acting as a 
registered Market Maker, and its affiliates, in the Shares to 
establish, maintain and enforce written policies and procedures 
reasonably designed to prevent the misuse of any material nonpublic 
information with respect to such products, any components of the 
related products, any physical asset or commodity underlying the 
product, applicable currencies, underlying indexes, related futures or 
options on futures, and any related derivative instruments (including 
the Shares).
    As a general matter, the Exchange has regulatory jurisdiction over 
its Equity Trading Permit Holders and their associated persons, which 
include any person or entity controlling an Equity Trading Permit 
Holder. A subsidiary or affiliate of an Equity Trading Permit Holder 
that does business only in commodities or futures contracts would not 
be subject to Exchange jurisdiction, but the Exchange could obtain 
information regarding the activities of such subsidiary or affiliate 
through surveillance sharing agreements with regulatory organizations 
of which such subsidiary or affiliate is a member.
Surveillance
    The Exchange represents that trading in the Shares of the Trust 
will be subject to the existing trading surveillances administered by 
the Exchange, as well as cross-market surveillances administered by 
FINRA on behalf of the Exchange, which are designed to detect 
violations of Exchange rules and applicable federal securities 
laws.\44\ The Exchange represents that these procedures are adequate to 
properly monitor Exchange trading of the Shares in all trading sessions 
and to deter and detect violations of Exchange rules and federal 
securities laws applicable to trading on the Exchange.
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    \44\ FINRA conducts cross-market surveillances on behalf of the 
Exchange pursuant to a regulatory services agreement. The Exchange 
is responsible for FINRA's performance under this regulatory 
services agreement.
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    The surveillances referred to above generally focus on detecting 
securities trading outside their normal patterns, which could be 
indicative of manipulative or other violative activity. When such 
situations are detected, surveillance analysis follows and 
investigations are opened, where appropriate, to review the behavior of 
all relevant parties for all relevant trading violations.
    The Exchange or FINRA, on behalf of the Exchange, or both, will 
communicate as needed regarding trading in the Shares and bitcoin 
futures with other markets and other entities that are members of the 
ISG, and the Exchange or FINRA, on behalf of the Exchange, or both, may 
obtain trading information regarding trading in the Shares and bitcoin 
futures from such markets and other entities. In addition, the Exchange 
may obtain information regarding trading in the Shares from markets and 
other entities that are members of ISG (including the CME and CFE) or 
with which the Exchange has in place a comprehensive surveillance 
sharing agreement (``CSSA'').\45\
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    \45\ For a list of the current members of ISG, see 
www.isgportal.org. The Exchange notes that not all components of the 
Trust may trade on markets that are members of ISG or with which the 
Exchange has in place a CSSA.
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    Also, pursuant to NYSE Arca Rule 8.201-E(g), the Exchange is able 
to obtain information regarding trading in the Shares and the 
underlying bitcoin through ETP Holders acting as registered ``Market 
Makers'', in connection with such ETP Holders' proprietary or customer 
trades through ETP Holders which they effect on any relevant market.
    In addition, the Exchange also has a general policy prohibiting the 
distribution of material, non-public information by its employees.
    All statements and representations made in this filing regarding 
(a) the description of the portfolios of the Trust or the Bitwise Daily 
Bitcoin Reference Price, (b) limitations on portfolio holdings, 
reference assets or the Bitwise Daily Bitcoin Reference Price, or (c) 
the applicability of Exchange listing rules specified in this rule 
filing shall constitute continued listing requirements for listing the 
Shares on the Exchange.
    The issuer has represented to the Exchange that it will advise the 
Exchange of any failure by the Trust to comply with the continued 
listing requirements, and, pursuant to its obligations under Section 
19(g)(1) of the Act, the Exchange will monitor for compliance with the 
continued listing requirements. If the Trust is not in compliance with 
the applicable listing requirements, the Exchange will commence 
delisting procedures under NYSE Arca Rule 5.5-E(m).
Information Bulletin
    Prior to the commencement of trading, the Exchange will inform its 
ETP Holders in an Information Bulletin of the special characteristics 
and risks associated with trading the Shares. Specifically, the 
Information Bulletin will discuss the following: (1) The risks involved 
in trading the Shares during the Early and Late Trading Sessions when 
an updated IIV will not be calculated or publicly disseminated; (2) the 
procedures for purchases and redemptions of Shares in Creation Units

[[Page 23136]]

(and that Shares are not individually redeemable); (3) NYSE Arca Rule 
9.2-E(a), which imposes a duty of due diligence on its ETP Holders to 
learn the essential facts relating to every customer prior to trading 
the Shares; (4) how information regarding the IIV is disseminated; (5) 
how information regarding portfolio holdings is disseminated; (6) the 
requirement that ETP Holders deliver a prospectus to investors 
purchasing newly issued Shares prior to or concurrently with the 
confirmation of a transaction; (7) trading information; and (8) NYSE 
Arca suitability rules.
    The Information Bulletin will also discuss any exemptive, no-
action, and interpretive relief granted by the Commission from any 
rules under the Act. In addition, the Information Bulletin will 
reference that the Trust is subject to various fees and expenses 
described in the Registration Statement.
    The Information Bulletin will also disclose the trading hours of 
the Shares that the NAV for the Shares will be calculated after 4:00 
p.m. E.T. each trading day. The Information Bulletin will disclose that 
information about the Shares will be publicly available on the Trust's 
website.
2. Statutory Basis
    The basis under the Act for this proposed rule change is the 
requirement under Section 6(b)(5) \46\ that an exchange have rules that 
are designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, to remove 
impediments to, and perfect the mechanism of a free and open market 
and, in general, to protect investors and the public interest.
---------------------------------------------------------------------------

    \46\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that the proposed rule change is designed to 
prevent fraudulent and manipulative acts and practices and to protect 
investors and the public interest in that the Shares will be listed and 
traded on the Exchange pursuant to the initial and continued listing 
criteria in NYSE Arca Rule 8.201-E. As discussed above, bitcoin trades 
in a well-arbitraged and distributed market that is significantly 
smaller, more orderly, and more regulated than commonly reported. As a 
result, as discussed above, any attempts at manipulation must involve a 
large share of global bitcoin volume, which would be substantially 
difficult to achieve. Accordingly, the notional size of the regulated, 
surveilled CME and CFE bitcoin futures markets (or even the CME market 
in isolation) is larger than all but one of the ten spot bitcoin 
exchanges, and is nearly as big as the largest exchange. In addition, 
prices on the CME and CFE futures markets are closely related to prices 
on the bitcoin spot market, and arbitrage between those prices is well-
established. Given the significant size of the CME and CFE futures 
market, and the close relationship in prices between the derivatives 
market and the spot market, there is a reasonable likelihood that a 
person attempting to manipulate the ETP would also have to trade on 
that market to successfully manipulate the ETP, since arbitrage between 
the derivative and spot markets would tend to counter an attempt to 
manipulate the spot market alone. As a result, the fact that the CME 
and CFE are ISG members would assist the Exchange in detecting and 
deterring misconduct.\47\
---------------------------------------------------------------------------

    \47\ See note 15, supra.
---------------------------------------------------------------------------

    The Exchange has in place surveillance procedures that are adequate 
to properly monitor trading in the Shares in all trading sessions and 
to deter and detect violations of Exchange rules and applicable federal 
securities laws. The Exchange or FINRA, on behalf of the Exchange, or 
both, will communicate as needed regarding trading in the Shares and 
bitcoin futures with other markets and other entities that are members 
of the ISG, and the Exchange or FINRA, on behalf of the Exchange, or 
both, may obtain trading information regarding trading in the Shares 
from such markets and other entities. In addition, the Exchange may 
obtain information regarding trading in the Shares from markets and 
other entities that are members of ISG or with which the Exchange has 
in place a CSSA. The Exchange is also able to obtain information 
regarding trading in the Shares and bitcoin futures or the underlying 
bitcoin through ETP Holders, in connection with such ETP Holders' 
proprietary or customer trades which they effect through ETP Holders on 
any relevant market.
    Quotation and last-sale information regarding the Shares will be 
disseminated through the facilities of the CTA. The Trust's website 
will also include a form of the prospectus for the Trust that may be 
downloaded. The website will include the Shares' ticker and CUSIP 
information, along with additional quantitative information updated on 
a daily basis for the Trust. The Trust's website will include (1) daily 
trading volume, the prior business day's reported NAV and closing 
price, and a calculation of the premium and discount of the closing 
price or mid-point of the Bid/Ask Price against the NAV; and (2) data 
in chart format displaying the frequency distribution of discounts and 
premiums of the daily closing price or Bid/Ask Price against the NAV, 
within appropriate ranges, for at least each of the four previous 
calendar quarters. The Trust's website will be publicly available prior 
to the public offering of Shares and accessible at no charge.
    Moreover, prior to the commencement of trading, the Exchange will 
inform its ETP Holders in an Information Bulletin of the special 
characteristics and risks associated with trading the Shares. The 
Information Bulletin will also discuss any exemptive, no-action, and 
interpretive relief granted by the Commission from any rules under the 
Act. In addition, the Information Bulletin will reference that the 
Trust is subject to various fees and expenses described in the 
Registration Statement. The Information Bulletin will also disclose the 
trading hours of the Shares and that the NAV for the Shares will be 
calculated after 4:00 p.m. E.T. each trading day. The Information 
Bulletin will disclose that information about the Shares will be 
publicly available on the Trust's website.
    Trading in Shares of the Trust will be halted if the circuit 
breaker parameters in NYSE Arca Rule 7.12-E have been reached or 
because of market conditions or for reasons that, in the view of the 
Exchange, make trading in the Shares inadvisable.
    The proposed rule change is designed to perfect the mechanism of a 
free and open market and, in general, to protect investors and the 
public interest in that it will facilitate the listing and trading of a 
new type of exchange-traded product based on the price of bitcoin that 
will enhance competition among market participants, to the benefit of 
investors and the marketplace. As noted above, the Exchange has in 
place surveillance procedures that are adequate to properly monitor 
trading in the Shares in all trading sessions and to deter and detect 
violations of Exchange rules and applicable federal securities laws.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purpose of the Act. The Exchange notes that the 
proposed rule change will facilitate the listing and trading of a new 
type of Commodity-Based Trust Share based on the price of bitcoin that 
will enhance competition among market participants, to the benefit of 
investors and the marketplace.

[[Page 23137]]

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Proceedings To Determine Whether To Approve or Disapprove SR-
NYSEArca-2019-01 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \48\ to determine whether the proposed rule 
change should be approved or disapproved. Institution of such 
proceedings is appropriate at this time in view of the legal and policy 
issues raised by the proposed rule change. Institution of proceedings 
does not indicate that the Commission has reached any conclusions with 
respect to any of the issues involved. Rather, as described below, the 
Commission seeks and encourages interested persons to provide comments 
on the proposed rule change.
---------------------------------------------------------------------------

    \48\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

    Pursuant to Section 19(b)(2)(B) of the Act,\49\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of the proposed rule change's consistency with Section 6(b)(5) 
of the Act, which requires, among other things, that the rules of a 
national securities exchange be ``designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade,'' and ``to protect investors and the public 
interest.'' \50\
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    \49\ Id.
    \50\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposal is 
consistent with Section 6(b)(5) or any other provision of the Act, or 
the rules and regulations thereunder. Although there do not appear to 
be any issues relevant to approval or disapproval that would be 
facilitated by an oral presentation of views, data, and arguments, the 
Commission will consider, pursuant to Rule 19b-4, any request for an 
opportunity to make an oral presentation.\51\
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    \51\ Section 19(b)(2) of the Act, as amended by the Securities 
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
---------------------------------------------------------------------------

    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved by June 11, 2019. Any person who wishes to file a rebuttal 
to any other person's submission must file that rebuttal by June 25, 
2019. The Commission asks that commenters address the sufficiency of 
the Exchange's statements in support of the proposal, which are set 
forth in Amendment No. 1,\52\ in addition to any other comments they 
may wish to submit about the proposed rule change. In particular, the 
Commission seeks comment on the following questions and asks commenters 
to submit data where appropriate to support their views:
---------------------------------------------------------------------------

    \52\ See supra note 6.
---------------------------------------------------------------------------

    1. What are commenters' views on the assertions by the Exchange and 
the Sponsor that bitcoin is uniquely resistant to manipulation? \53\ 
What are commenters' views on the Sponsor's analysis as described by 
the Bitwise Presentation, and by the Exchange in Amendment No. 1, 
including the factual basis for the assertions made and the selection 
of the trading periods analyzed?
---------------------------------------------------------------------------

    \53\ The Sponsor made a number of representations to the 
Commission in a presentation dated March 19, 2019 (``Bitwise 
Presentation''). See supra note 15.
---------------------------------------------------------------------------

    2. What are commenters' views on the assertions by the Exchange and 
the Sponsor regarding the nature of the market for bitcoin, including 
the efficiency of that market, the susceptibility of that market to 
manipulation, and the ways in which that market is, or is not, similar 
to the markets for other commodities?
    3. What are commenters' views on the assertion by the Exchange and 
the Sponsor that a significant, regulated and surveilled market for 
bitcoin futures exists and that it is closely connected with the spot 
market for bitcoin? What are commenters' views on whether there is a 
reasonable likelihood that a person attempting to manipulate the Shares 
would also have to trade in the bitcoin futures market to manipulate 
the Shares? What are commenters' views on whether it is likely that 
trading in the Shares would be the predominant influence on prices in 
the bitcoin futures market?
    4. What are commenters' views on the relationship between the 
bitcoin futures market and the bitcoin spot market? For example, what 
is the relative size of these markets, and where does bitcoin price 
formation occur? Does the market, spot or futures, in which price 
formation occurs affect commenters' analysis of whether it is 
reasonably likely that someone attempting to manipulate the Shares 
would be reasonably likely to have to trade in the bitcoin futures 
market, or that trading in the Shares would be the predominant 
influence on prices in the bitcoin futures market? To what extent, if 
at all, do recent developments in the bitcoin futures market--namely, 
the cessation of new bitcoin futures contract trading on the Chicago 
Futures Exchange--affect commenters' analysis of these questions?
    5. What are commenters' views on whether the Exchange could enter 
into surveillance-sharing agreements with regulated spot markets of 
significant size related to bitcoin?
    6. What are commenters' views on the Sponsor's assertions that a 
large percentage of publicly reported spot volume in bitcoin is 
``fake'' or ``non-economic in nature''? What are commenters' views on 
the method by which the Sponsor purports to distinguish ``real'' 
bitcoin trading volume from ``fake'' bitcoin trading volume? What are 
commenters' views on the Sponsor's estimate of the average daily 
``real'' volume of trading in the bitcoin spot market?
    7. What are commenters' views on the Sponsor's assertion that the 
10 identified bitcoin trading venues represent ``substantially all of 
the economically significant bitcoin trading volume in the world 
(outside of capital-controlled countries)''? What are commenters' views 
on whether over-the-counter trading in bitcoin is economically 
significant, and what are commenters' views on the share of bitcoin 
spot trading that takes place in the over-the-counter market? Does 
economically significant bitcoin spot trading occur elsewhere?
    8. What are commenters' views on the effectiveness of arbitrage 
among the 10 bitcoin trading venues identified by the Sponsor? What are 
commenters' views on whether the price of bitcoin on these venues can 
be affected by activity on other bitcoin trading venues, including 
other centralized trading venues, the over-the-counter market, or 
bitcoin derivatives markets? What are commenters' views on the 
Sponsor's

[[Page 23138]]

description of the bitcoin market as a ``globally integrated market for 
a fungible good''?
    9. What are commenters' views on the degree to which each of the 10 
identified bitcoin trading venues is subject to regulation? What are 
commenters' views on the extent to which each of these venues can, or 
does, conduct surveillance of bitcoin trading activity?
    10. What are commenters' views on the methodologies by which the 
Bitwise Daily Bitcoin Reference Price and the Bitwise Real-Time Bitcoin 
Reference Price are calculated? What are commenters' views on the role 
of the Bitwise Crypto Index Committee in determining which trading 
venues will contribute prices to the Bitwise Daily Bitcoin Reference 
Price and the Bitwise Real-Time Bitcoin Reference Price?
    11. What are commenters' views on the use of the Bitwise Daily 
Bitcoin Reference Price to calculate the net asset value of the Shares? 
What are commenters' views on the alternative valuation methods 
proposed by the Sponsor? What are commenters' views on whether any of 
these pricing mechanisms, primary or alternate, would be affected by, 
or resistant to, manipulative activity in bitcoin markets?
    12. The Exchange represents that, as of April 26, 2019, the Bitwise 
Crypto Index Committee removed Bitfinex from the list of trading venues 
that contribute prices to derive the Bitwise Daily Bitcoin Reference 
Price. The Exchange states that this action was taken ``pursuant to the 
New York Attorney General's claims towards iFinex Inc., operator of 
Bitfinex.'' What are commenters' views on whether the removal of 
Bitfinex--which the Sponsor asserts is a ``real'' trading venue--from 
the calculation of the Bitwise Daily Bitcoin Reference Price might 
affect the reliability or accuracy of that price? Does the removal of 
the Bitfinex venue from the calculation of this reference price because 
of regulatory or legal activity affect commenters' views of the 
Sponsor's screening process for bitcoin trading venues or its general 
distinction between ``real'' and ``fake'' bitcoin trading volume? Does 
the removal of the Bitfinex venue from the calculation of this 
reference price affect commenters' views of whether it is appropriate 
to use the Bitwise Daily Bitcoin Reference Price to calculate the net 
asset value of the Shares?
    13. What are commenters' views on the Sponsor's assertions 
regarding how bitcoin trading versus Tether compares to or might affect 
bitcoin pricing more generally? What are commenters' views on whether 
bitcoin trading versus Tether might affect the calculation of the net 
asset value of the Shares?
    14. What are commenters' views on the Sponsor's assertions that the 
proposed in-kind creation and redemption mechanism and payment of Trust 
expenses directly in bitcoin would insulate holders of the Shares from 
harm resulting from manipulation of the Shares' net asset value?
    Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NYSEArca-2019-01 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSEArca-2019-01. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NYSEArca-2019-01 and should be submitted 
by June 11, 2019. Rebuttal comments should be submitted by June 25, 
2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\54\
---------------------------------------------------------------------------

    \54\ 17 CFR 200.30-3(a)(12) & 17 CFR 200.30-3(a)(57).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-10351 Filed 5-20-19; 8:45 am]
BILLING CODE 8011-01-P


